Starbucks cards don't sit idle, help drive sales

As holiday horror stories go, gift-card blunders are approaching the status of ugly sweaters and bad cologne.

According to Consumer Reports, more than a quarter of gift-card recipients don't use all of them. About $8 billion went unredeemed last year, TowerGroup estimates, which was almost 10 percent of the amount given.

Gift cards are the tech-age version of gift certificates, and they make it easier for such small-ticket retailers as coffee shops to get in the game. As the world's largest coffee-shop chain, Starbucks is driving dizzying growth in that segment.

A little more than 11 percent of people surveyed during the 2006 holiday season said they bought gift cards at coffee shops, up from 6.9 percent the year before. The National Retail Federation survey was conducted by BIGresearch.

Starbucks says its cards do not sit idle because people can buy a few items — lattes, for example — for as little as $10 or $15. Someone could order a round for the house at just $50, which barely gets a foot in the door of a high-end department store.

Starbucks' figures prove the point. Last fiscal year, customers activated cards worth $737.4 million. They redeemed cards for even more: $1.04 billion. The second figure is higher because Starbucks has sold gift cards since 2001, so there were unused dollars from earlier years, and people regularly reload the cards.

Customers redeem Starbucks cards so quickly that it helps the company anticipate sales. After racking up $352.2 million on cards last holiday season, customers redeemed almost that much in the following three months, a whopping 14.5 percent of total sales for the quarter.

Starbucks and other retailers cannot include the card dollars as revenue until they are redeemed. The rest sits on balance sheets accruing interest.

Starbucks sells more cards each year because it keeps adding stores and offering cards in more countries. Last holiday season, it activated 23.6 million new cards, a 32 percent boost from the year before. The company does not disclose volumes from 2001-05 because it changed accounting procedures when it started accepting cards across international borders in 2005.

Starbucks cards can be used in the U.S., Australia, Canada, Hong Kong, Ireland, Mexico and the United Kingdom. Cards sold in Greece, Japan, Spain, Taiwan and Thailand cannot be used outside the country where they are purchased.

Such big coffee-selling chains as McDonald's and Dunkin' Donuts also have joined the gift-card fray.

Dunkin' Donuts, which operates mostly east of the Mississippi River and sells as much coffee as it does doughnuts, began offering the cards in 2003. It does not say how many it sells, but the chain touts itself as the first coffee retailer to offer cards that customers can customize with their own photos. The customization costs $4.50.

Starbucks launched a card-personalization program this year that lets customers create cards with their names and their favorite drinks or cartoon versions of themselves. The cards cost $4, including shipping, and come in four denominations.

Non-personalized Starbucks cards have no fees and can be bought in any amount from $5 to $500.

Starbucks does not welcome all forms of personalization. The webmaster of StarbucksGossip.com was stopped by company censors when he tried to order a card with his Web site's name.

"Something like 'Fluffy is my favorite cat' might get approved," Jim Romenesko wrote on his site.

A Starbucks spokeswoman said the company's policy is to avoid anything that would offend baristas or harm the brand.

"The term 'gossip' could be deemed offensive or harmful to our brand," Lisa Passé explained.

That might explain why CelebrityStarbucks.com got its name on a Starbucks card when StarbucksGossip.com did not.

McDonald's, which began selling Arch Cards in 2005, insists it is not copying the coffee giant.

"We are not in competition with Starbucks," said McDonald's USA spokeswoman Shannelle Armstrong. "We focus on what our customers want."

Lately, that has meant premium salads, better coffee, iced coffee and gift cards — all things available at Starbucks, too.

McDonald's does not disclose how many cards it sells. The chain has about twice as many stores as Starbucks worldwide but offers the Arch Card only at 13,000 U.S. stores. It plans to launch the card in Canada soon, Armstrong said.

Starbucks isn't worried about the competition. "When someone gives the gift of a Starbucks card, they are actually gifting the experience as well as the product," Passé said.

Melissa Allison: 206-464-3312